Coach is actually a very well run retailer, led by a very good CEO - however this is like having the best house in a run down, crime riddled neighborhood (retail)
Back in August 2007 I wrote [Aug 28, 2007: Coach as the True Retail Tell]
Many people are citing the deteriorating retail numbers as a tell on the economy; citing Walmart (WMT) in particular - well I'd like to use Coach (COH) as my tell. "Coach is a bit of a status symbol, and something many people in mid/upper class suburbia buy. The problem is many people in suburbia are overextended on their $600,000 home bought with 0% down interest only loans. This does not mean they they don't have good credit; it just means they are very leveraged. So it's a risk."
So in fact I think this is a lot better tell on the economy than Walmart. The core customer of Walmart is more of the discount shopper already strained by the hikes in gas, energy, and now grocery prices.... whereas the core shopper of Coach is the suburbia soccer mom who loves her trinkets (do you know there are even websites now where you can rent a purse, errr... handbag - in fact, I just googled and I also found a competing site.) This speaks to America's obsession with appearances and keeping up with the Joneses. Even when one cannot afford a handbag, one can pretend to show others they can afford it for the evening. So with this subset of consumer being the main subset buying $450K homes in northern VA, $600K homes in southern CA, $800K homes in northern CA, $400K homes in AZ/NV - many with little down and some scary initial 2 year teaser terms, I am watching Coach to see how it performs. To me, it's a great tell.
In October 2007 [Oct 9, 2007: Our Old Friend Coach - Don't Forget Her] as the market ran to all time highs I wrote
Again, I cannot be short in this fund, but many retailers and restaurant stocks are going to be great shorts (note: exclude restaurants with international exposure like a YUM or MCD or those with $5 type of menus - most of the middle end chains I see a slowdown both from the consumer and major squeeze on their costs) Don't ignore the fact the weaker dollar hurts importers - and some of our food supply comes from overseas; so on top of the domestic food inflation we have the imported kind - on top of a weaker dollar.
But I think Coach (COH) is telling us, the US consumer is finally slowing down without access to 'the ultimate credit card i.e. the house'.
Later in October I wrote [Oct 23, 2007: I'm Feeling a bit Smug this Morning - Coach Down 7% on Earnings]
I went negative on Coach in the mid $40s and its now trading at $38 or a 15% drop in 60 days. It is now at levels not seen since November 2006 - so for 'buy and hold' types, an entire year just got wiped out.
Any bounces in domestic facing retailers aside from a few very narrow niches, restaurants, homebuilders, and financials will continue to be good shorts.
The point is, none of that matters in the face of the aspirational US consumer now unable to nurse herself at the trough of easy credit. The consumer is now at the last stage, turning to credit cards. Once those are maxxed out I don't know the next step. Defaults? We are seeing financial after financial reporting major increases in future loss provisions in their consumer divisions.
By December 2007, the stock had begun its implosion [Dec 19, 2007: Coach Imploding]
But for now this is a play on the US and Japanese consumer. Both slow growth economies facing some very large structural problems - and at least in this country with a government unwilling to face them by cutting back spending and not driving the country into subprime status.
In spring 2008 I wrote [Apr 22, 2008: Coach with Interesting Report]
As I have predicted, many retailers will begin to pull back from all forecasting for the year as the true economy shows in their numbers, as opposed to the multinationals whose foreign sales are masking domestic weakness. All their current 2008 guidance is fiction, and this will be proven true by December 2008. So they are not "cheap", despite what CNBC says. That does not mean they won't rally from time to time, especially when those rebate checks hit, Q3 GDP is artificially boosted, and the seals across financial media will clap their hands in glee.
So all this has come to pass, despite the constant "buy the bottoms" and "stop being so gloomy" calls since I started this website. I have not been watching Coach that closely of late since I could not benefit from my short calls, but I saw this weekend it warned (again) Thursday. They also PULLED guidance due to uncertainty - as I said we'll begin to see over and over. Only financial media pundits have a "clear view" on the 2nd half 2009 recovery - somehow they are smarter than the companies actually living and breathing in the real economy.
- Coach Inc. on Thursday cut its second-quarter profit estimate after a dismal holiday shopping season led to a 13 percent drop in comparable store sales during the quarter.
- The maker of high-end purses cut its second-quarter profit projection to 67 cents per share, 10 cents lower than a previous estimate of 77 cents per share and 3 percent lower than what it earned a year earlier.
- Coach also said it would not give earnings guidance for the second half or full year fiscal 2009 give the "uncertain environment."
Short term chart
Long term chart
I continue to believe consumer discretionary should be shorted on all these hyped up "recoveries coming in 6 month" rallies. This is a structural change we are embarking on - the punditry still believes it it some sort of "one off" recession. So every 7-8 weeks the breathless "recovery" talk begins in earnest, these stocks rocket up 40% and we are told "the stocks are telling us the recovery is coming". Not.Speaking of consumer discretionary, I had pointed out Las Vegas Sands (LVS) as a rally to short - its down about 33% in a week.
Have the CNBC commentators started questioning the Kool Aid of "It's all priced in" yet?No positions
